Jernigan Capital grows storage investments as development game enters second half

Some industry observers warn of potential overbuilding within the self-storage industry, but Dean Jernigan is confident that the development cycle is still in the middle-innings.

“We’re just past the midpoint of this development cycle, in the fifth or sixth inning,” said Jernigan, CEO of Memphis, TN-based Jernigan Capital, during the company’s quarterly conference call with analysts.

Jernigan Capital, a publicly traded provider of debt and equity to owners and developers of self-storage facilities, last week released its first quarter financials that showed the firm closing on $105.6 million in development investments, its largest quarter ever, and expanding its total pipeline of investments to $825 million.

However, Jernigan said some areas of the country are in the later stages of the cycle.

“I think Texas, the game is almost over for all the major markets there. It’s ninth inning-plus. Florida, New York City, I would put those in about the seventh inning.”

Preparing for a soft landing

Jernigan said the sector isn’t headed for an over-supply glut that occurred last decade, before the Wall Street crash and recession. Self-storage developers this decade seem to be more choosy about where they build and how they build, he said

“I’ve seen no big mistakes yet,” Jernigan said. “Literally none around the country. So that speaks to the professionalism of the developers and it speaks to the success of those properties and also the success of properties around them.”

But Jernigan, the former CEO of CubeSmart and founder of Storage USA (sold to Security Capital Group/GE Capital for $1.8 billion in 2002), made clear that all good things come to end – and last week he did address the prospects of the boom coming to the end and the probability of a “soft landing” for the sector, compared to last decade’s disastrous hard landing.

Earnings look strong

Wall Street investors didn’t exactly jump for joy with release of the quarterly numbers last week, with its stock holding steady at around $22 a share.

Then again, maybe Wall Street investors had already built in the anticipated solid gains, having doubled Jernigan Capitals’ share prices from about $11 last April – its lowest share price since going public in early 2015 – to today’s $22 range.

Jernigan said the recent results has left him “very optimistic” about the firm’s growth into the foreseeable future.

John Good, president and COO of the firm, said Jernigan Capital has already executed term sheets for another $212 million in investments and has an additional $613 million of “high quality prospective investments” in the underwriting process. The firm is now projecting its performance this year will exceed anything seen in 2015 and 2016.

Filling a “niche left by banks”

David Corak, an equity analyst and vice president of research at FBR & Co., didn’t use baseball metaphors to describe Jernigan Capital. But he said he likes what he sees from the self-storage finance company, which lends mostly to regional self-storage developers and owners.

“It’s a very different animal from other public storage companies,” said Corak, noting Jernigan’s development loans usually come with a 50 percent equity stake in properties if and when they’re sold. Even if the market turns south, Jernigan Capital is positioned to take over the properties it’s invested in over the years, he said.

Cosak also praised the management team at Jernigan Capital, particularly Dean Jernigan, the self-storage industry veteran.

“They’re filling a niche left by banks,” said Cosak of Jernigan Capital’s business model. “It’s a nice niche.”